New London — Ten years ago, on July 28, 2008, federal regulators arrived early in the morning at the tiny New London Security Federal Credit Union to close down the more than 70-year-old institution, only to find that someone apparently had broken into the office overnight.

"It looked like somebody had tried to get past the molding to pop the lock," recalled Gary Meisinger, an examiner in the Hartford office of the National Credit Union Administration, in a January 2014 deposition The Day obtained as part of a Freedom of Information Act request involving more than 2,000 pages of transcripts.

On that day, the credit union regulatory agency, which already had called in the FBI to investigate, declared the institution insolvent, leaving dozens of investors to wonder what had happened and whether they would ever get back their money. Meisinger said a locksmith had been called to open the office door as the NCUA prepared to preserve records of what it suspected was a massive fraud involving millions of dollars.

Liz Whitehead, an NCUA regional director, was about to step inside when Meisinger blocked her, afraid someone might still be inside the narrow second-floor office, not much bigger than a large closet, where the credit union did business.

"We did not know what we were going to find in there," Meisinger testified. "So I went in first, and then the others came in."

Once inside, they found the deadbolt disengaged. The safe was unlocked, as was a normally secure file cabinet that credit union manager Janice Brady testified had been closed the night before.

"I was shocked ... disbelief," she said.

[naviga:img class="img-responsive" src="/Assets/news2018/edrachleffobit.jpg" alt="Edwin F. Rachleff"/]

Edwin F. Rachleff, in the undated photo that ran with his obituary in the July 30, 2008, edition of The Day.

A few hours later, Edwin F. Rachleff, longtime investment adviser at the credit union and beloved stock broker for the now-defunct A.G. Edwards in New London and Waterford, would be found dead after jumping from the 11th floor of the Mohican Senior Apartments.

His friend and credit union board member, the late Reubin "Rip" Levin, wouldn't hear about the financial institution's demise until the next day, when he read it in the paper. According to a transcript, Levin called someone to ask what was going on.

"What did Eddie say?" Levin remembers saying to the unidentified associate.

"Eddie's dead," came the reply.

"That's how I knew," Levin testified. "A shock for all of us."

About a year later, federal authorities identified Rachleff as the likely sole perpetrator of an embezzlement scheme that they later said lasted 20 to 40 years and cost insurers and local depositors about $11.7 million. Some declared it a "mini-Madoff" embezzlement scam, referring to a spectacular $64.8 billion Ponzi scheme in New York City involving financier Bernie Madoff that unraveled the same year.

In the hundreds of pages of sometimes redacted transcripts from a lawsuit that later was settled out of court, there is no indication where most of the money went. The question was barely pursued by lawyers on either side of the lawsuit the NCUA brought against Wells Fargo Advisors, which bought A.G. Edwards shortly before the scam was discovered and therefore inherited the brokerage house's legal liabilities.

In one of the few unredacted questions that directly addressed what Rachleff had done with the money, Wells Fargo attorney Richard Szuch asked Charles Funderburk, a senior auditor for the NCUA, whether he ever concluded where the money went and when it was misapplied.

"I don't recall if we did or didn't," Funderburk said in a January 2014 deposition about seven and a half years after the credit union's failure.

The NCUA did not immediately respond to questions sent Tuesday about whether it in fact ever did try to trace the Rachleff money to find out what it was used for, or if the scam simply went back too far to identify pertinent records.

According to the transcripts, Rachleff enjoyed well-made suits, occasional overnights in New York City and golf outings with friends, but he didn't flaunt his wealth or have expensive habits.

He attended synagogue regularly and had supported local nonprofits, most notably Lawrence + Memorial Hospital. He was a former president of the prestigious downtown Thames Club and a longtime member of the Masons, Shriners and New London Kiwanis, also serving as president of the local Navy League.

"He was a very outgoing person, very well known in the community," said former board Chairman Herbert Linder in a December 2012 deposition. And when they went out, "We always split the check."

"He wasn't a profligate spender," Levin recalled in a December 2012 deposition. "He didn't go on great vacations. ... It's a puzzlement to everybody."

Describing Rachleff's Reyquinn Street home that he shared with wife, Naomi, Levin said, "No million dollar estate. No castle. Furnished very tastefully but not extravagantly."

'We've never seen anything like it'

While the biggest question left after the embezzlement remains a mystery based on the public record, some new details emerged from the transcripts.

Rachleff, in the last two decades or so of the scam, actually was putting money — over $1 million — into the credit union's account, apparently to cover his tracks as members began to withdraw large sums due partly to an aging population. "It's remarkable," said NCUA attorney Szuch during one deposition. "I mean, our auditors have taken a look at it and we've never seen anything like it where someone ... over a 10- to 20-year period actually paid it back through direct deposits from his own brokerage and bank accounts."

Neither the credit union board nor its managers ever verified the existence of the New London Security account at A.G. Edwards, instead relying on typed statements that purported to show account values while Rachleff put money from the credit union into a family account in the name of his father-in-law's former business, Elmore Shoe Co. Rachleff never opened up an account for the credit union at A.G. Edwards, a fact that left brokerage business expert John D. Maine "absolutely incredulous" as he wondered why the New London Security board never had looked to see where the money it deposited went.

Rachleff apparently intercepted attempts to verify the accounts that the credit union had been told were at his brokerage house, A.G. Edwards, and sent back verifications that were faked and sometimes unsigned, yet no one flagged the issue. What's more, the one time that a verification letter went to the proper authorities in St. Louis, a clerk at A.G. Edwards never alerted anybody to the incorrect account number listed, instead merely writing in the number of a pension account that was held by the credit union manager at the brokerage.

In the last five years of the scam, the credit union did not send a single check to its investment firm. And Rachleff was not taking any commissions for his purported credit union investment work, apparently because he never actually completed the transactions he faked, but the pro bono work apparently raised no concerns.

The credit union's board of directors, apparently at the urging of Rachleff, had been careful to keep total assets below $12 million to fall under the threshold for more aggressive regulation by NCUA. The credit union over the last few years of its existence also had put progressively smaller monthly limits on the amount that members could add to their accounts, another attempt, perhaps, to keep the credit union's assets below that $12 million threshold.

The scam was discovered largely because of the diligence of a new NCUA examiner brought in for the first time to visit the New London credit union. He engaged the services of an expert to look more closely at the investments, quickly finding they didn't exist. 

The credit union near the end had an extremely high interest rate — 5 percent — for savings accounts, perhaps in an attempt to dissuade members from reducing their holdings so that Rachleff wouldn't need to keep taking money from his accounts, an attorney suggested.

A.G. Edwards in 2004 discovered through a Google search that Rachleff was a member of the credit union board, which was a violation of the brokerage company's policy without prior approval. That's what prompted him to resign from the board after 19 years.

Board member Levin, named head of the credit union's supervisory committee that was supposed to improve oversight of Rachleff, thought the title was largely ceremonial. "I never got any instructions on what I was supposed to do," he said.

The credit union's local auditors, the now defunct Beller Shepatin & Co. of New London, came in for sharp criticism for inadequate oversight, including its apparent forwarding of account-verification paperwork to the credit union manager, rather than directly to A.G. Edwards.

But perhaps the greatest criticism was reserved for the credit union's board of directors, who, according to testimony, were consistently told to put checks on Rachleff but neglected to do so, including allowing him to be on the board of directors for many years despite an obvious conflict of interest.

Levin perhaps explained the board's view of Rachleff when he called the money manager "solid rock. ... I would trust him with anything."

Rachleff acted alone

In an email from one NCUA official to another cited in one transcript, it was noted that credit union board members had been uncooperative with the NCUA in the past, sparring with regulators over regular reviews that turned up a lack of internal controls designed to safeguard investors' money.

The board and credit union manager, Mary Lou Richards, acted in such lock step with Rachleff that NCUA authorities at first suspected one or more officials might have been in cahoots with the longtime investment adviser, the transcripts show.

Richards, particularly, was cited in the documents for admitting to typing up some of the account summaries submitted to the board based on numbers dictated by Rachleff. In the end, the FBI concluded that only Rachleff was to blame for the embezzlement, transcripts show.

The Jewish-run credit union was a vestige of the past, with its manual accounting system that hadn't changed much since its beginnings in the 1930s, when Jews largely were excluded from getting loans through the local banking system. Only about 10 credit unions in the country had failed to convert to computer-based systems by the time regulators closed New London Security, according to the NCUA.

The NCUA at first sued credit union board members Herb Linder, Marty Yavener, Hinda Kimmel, Reuben Levin and Martin Lazarus, along with auditing firm Edward Lorah & Co., successor of Beller Shepatin, and other parties, but eventually dropped all but Wells Fargo from the legal action.

Still, the NCUA itself came in for criticism for allowing the scam to go on so long, and the agency overhauled its oversight of smaller credit unions after a critical 2010 report from its Office of Inspector General that cited incomplete examinations and poor follow-up in the New London Security Federal Credit Union case and others.

Modernizing its ways, the NCUA in 2012 released a new national supervision manual that established a formal method for reviewing credit unions.

$375,000 in uncompensated losses

For people like Florida resident Mark Fetcher, the improved supervision came too late. Fetcher had one of 13 credit union accounts whose deposits were in excess of the $100,000 insurance limit at the time.

Fetcher said in an email that he had two separate accounts and was expecting to be insured for $200,000 in losses, but got half the amount. He said he will be searching for legal representation to try to get all of the money he lost returned and would like to see those responsible for supervising Rachleff held responsible.

"The credit union board and officers neglected to properly supervise him and make changes that they were ordered to do, either on purpose or due to being 'asleep at the wheel,'" he said in an email last week. "A.G. Edwards/Wells Fargo should be held accountable for the actions of their representative."

In all, according to NCUA, local depositors received $9.9 million in insurance compensation for their losses, based on the money that had been recorded by New London Security. That left about $375,000 in uncompensated losses after the NCUA's settlement with Wells Fargo.

With recriminations on all sides, attorneys during the lawsuit depositions shifted blame to the various parties involved in overseeing the money. For longtime board member Levin, it didn't make sense that it had taken so long to catch up with Rachleff and his "fake investments."

"What I can't understand is why nobody, the accountants who made a certified statement (every) year, the NCUA who was in every three months, why didn't anyone ever ask to see the assets — to verify the assets?" he said. "They verified our bank statements, or balances every year. Didn't someone have to say, 'Let me see the bonds?'"

"This is not a brilliantly made up operation where we have 100 people in the back office turning out false statements," he added. "This is one guy. It's incomprehensible."

l.howard@theday.com